No shocks as Eskom reports annual results

MORE of the same. That is what Eskom CE Brian Dames and finance director Paul O'Flaherty delivered at the release of the utility's annual results yesterday.

While neither man pulled a rabbit out of the hat, the results are worth a close look for information on the state of the electricity system, issues around coal supply and quality, and updates on the capital expansion programme, electricity sales and primary energy costs.

Then there is the small matter of commodity-linked electricity pricing and supply agreements. Eskom is renegotiating its last remaining commodity-linked power agreement with BHP Billiton.

Many were hoping for clues on Eskom's imminent application to the National Energy Regulator of SA (Nersa) on tariff increases. And Eskom gave very little away. However, at least legal and regulatory affairs head Mohamed Adam could say that the utility would request a five-year determination period, a deviation from the three-year cycles in MYPD 1 and 2. This is a clear indication that Eskom wants the migration to reflective tariffs to be gradual.

It is also in line with the government's wish that Eskom's tariff increases do not hurt economic growth and job creation. Public Enterprises Minister Malusi Gigaba says there are continuing talks about Eskom's tariff application. The government seems unwavering in its stance - the tariff structure should protect the poor and not frustrate efforts to create jobs and build the economy.

The recent higher tariffs from Nersa have put Eskom on a strong financial footing. In the past financial year, it was granted an average 25,8% tariff increase.

Mr Dames says the utility still wants tariffs to move to a point where they reflect the cost of producing power. Earlier this year, Eskom asked Nersa to reduce the tariff increase for this financial year (2012 -13) from the approved 25,9% to 16%.

It is almost a given that SA can expect Eskom to request tariffs lower than the average 25% increases seen in the past two years. But "lower" is relative because the requested increases are likely to be at levels well above inflation. This is partly because of the integration of independent power producer (IPP) power. There is still a big disparity between the price at which Eskom buys private power and what it charges consumers. In the past financial year it bought electricity from IPPs for 77c/kWh and sold it for just more than 50c/kWh.

With the government IPP procurement programme to buy 3725MW of renewable energy power by 2016, Eskom will be expected to buy more of the relatively expensive IPP power, and the cost of this will have to be factored into the tariffs.

When it comes to its performance, Eskom has become predictable. As expected, higher tariffs were behind the increase in its revenue. Mr O'Flaherty says the utility should be boring and predictable. A boring Eskom is not necessarily a bad thing. It is not desirable for a utility responsible for almost all of the country's electricity supply to spring surprises.

Eskom's annual results can be figured out from its interim results. The utility says its financial results are highly seasonal, with the profit earned in the first half of the financial year, which covers the winter months when electricity demand is higher and large customers pay higher tariffs, while maintenance costs are lower as less planned maintenance takes place.

In the six months to the end of September, Eskom reported a R12,8bn net profit. At year-end, net profit was R13,2bn. Mr O'Flaherty says that in the past financial year Eskom stayed within the targets set by Nersa. The regulator sets Eskom targets on, among others, revenue, primary energy and profit.

As expected, the good financial performance raises the issue of bonuses for Eskom executives. Asked about this yesterday, chairman Zola Tsotsi's response was brief - the utility had made provision for the payment of bonuses and these were based on the performance of the business.

But Mr Gigaba gave a more animated response to the same question. While he acknowledged that the payment of bonuses was the board's decision, he urged it "to make the right decision", especially as the government is asking everyone to tighten their belts.

MORE of the same. That is what Eskom CE Brian Dames and finance director Paul O'Flaherty delivered at the release of the utility's annual results yesterday.

While neither man pulled a rabbit out of the hat, the results are worth a close look for information on the state of the electricity system, issues around coal supply and quality, and updates on the capital expansion programme, electricity sales and primary energy costs.

Then there is the small matter of commodity-linked electricity pricing and supply agreements. Eskom is renegotiating its last remaining commodity-linked power agreement with BHP Billiton.

Many were hoping for clues on Eskom's imminent application to the National Energy Regulator of SA (Nersa) on tariff increases. And Eskom gave very little away. However, at least legal and regulatory affairs head Mohamed Adam could say that the utility would request a five-year determination period, a deviation from the three-year cycles in MYPD 1 and 2. This is a clear indication that Eskom wants the migration to reflective tariffs to be gradual.

It is also in line with the government's wish that Eskom's tariff increases do not hurt economic growth and job creation. Public Enterprises Minister Malusi Gigaba says there are continuing talks about Eskom's tariff application. The government seems unwavering in its stance - the tariff structure should protect the poor and not frustrate efforts to create jobs and build the economy.

The recent higher tariffs from Nersa have put Eskom on a strong financial footing. In the past financial year, it was granted an average 25,8% tariff increase.

Mr Dames says the utility still wants tariffs to move to a point where they reflect the cost of producing power. Earlier this year, Eskom asked Nersa to reduce the tariff increase for this financial year (2012 -13) from the approved 25,9% to 16%.

It is almost a given that SA can expect Eskom to request tariffs lower than the average 25% increases seen in the past two years. But "lower" is relative because the requested increases are likely to be at levels well above inflation. This is partly because of the integration of independent power producer (IPP) power. There is still a big disparity between the price at which Eskom buys private power and what it charges consumers. In the past financial year it bought electricity from IPPs for 77c/kWh and sold it for just more than 50c/kWh.

With the government IPP procurement programme to buy 3725MW of renewable energy power by 2016, Eskom will be expected to buy more of the relatively expensive IPP power, and the cost of this will have to be factored into the tariffs.

When it comes to its performance, Eskom has become predictable. As expected, higher tariffs were behind the increase in its revenue. Mr O'Flaherty says the utility should be boring and predictable. A boring Eskom is not necessarily a bad thing. It is not desirable for a utility responsible for almost all of the country's electricity supply to spring surprises.

Eskom's annual results can be figured out from its interim results. The utility says its financial results are highly seasonal, with the profit earned in the first half of the financial year, which covers the winter months when electricity demand is higher and large customers pay higher tariffs, while maintenance costs are lower as less planned maintenance takes place.

In the six months to the end of September, Eskom reported a R12,8bn net profit. At year-end, net profit was R13,2bn. Mr O'Flaherty says that in the past financial year Eskom stayed within the targets set by Nersa. The regulator sets Eskom targets on, among others, revenue, primary energy and profit.

As expected, the good financial performance raises the issue of bonuses for Eskom executives. Asked about this yesterday, chairman Zola Tsotsi's response was brief - the utility had made provision for the payment of bonuses and these were based on the performance of the business.

But Mr Gigaba gave a more animated response to the same question. While he acknowledged that the payment of bonuses was the board's decision, he urged it "to make the right decision", especially as the government is asking everyone to tighten their belts.

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